As Atlantic Yards Gets Pricier, How Much Red Ink Can Ratner Absorb?

December 4, 2009

Uberdeveloper-turned-Nets-owner Bruce Ratner better have some good meds, because this is rapidly shaping up to be a month of rapid mood swings for him and his Atlantic Yards project. While Tuesday’s granting of a desperately needed investment-grade rating for the Nets arena bonds must have been a sigh of relief for Ratner, since then he’s been pelted by less-good news that promises to take chunks out of his wallet:

As a condition of not consigning the arena bonds to a junk rating, Moody’s and Standard & Poor’s forced Ratner to cut the amount of tax-free bonds from $650 million to $500 million — which means more money that must be raised either by more expensive taxable bonds, or via cash from Ratner or his new Russian pal.

Though Develop Don’t Destroy was quick to claim that the Columbia ruling “breathes new life” into their challenge to the use of eminent domain in Brooklyn, it’s a pretty long shot that that’ll happen — as Norman Oder notes, first the Columbia decision has to be upheld on appeal, and then the courts would have to agree to reopen the Atlantic Yards ED case.

But it does threaten to add a new sliver of doubt to the Nets deal, and that couldn’t come at a worse time for Ratner, who’s currently in the midst of trying to buy bond insurance, set interest rates, and then actually convince bond buyers to put their money in the arena bonds — all things that are get more costly with every added uncertainty about the project. Little wonder, then, that Develop Don’t Destroy lawyer Matt Brinckerhoff made sure to raise this point, telling Oder, “If I was involved in the bond sale, I would be looking at this decision and it would concern me, in a way that is very unexpected.”

So, Ratner and partner Mikhail Prokhorov are looking at getting less naming-rights money, and paying through the nose for the arena debt. At what point, then, does Atlantic Yards stop being a viable investment, and instead turn into a sea of red ink?

For a glimpse at that, we must turn to page 89 of the 772-page bond offering document released yesterday by Goldman Sachs that was the source of the naming-rights revelations. (Posted here by Eliot Brown of the Observer, who dug through it in the first place; annoying registration required.) This lists all of the revenue streams — from suite sales to concessions revenue to a $1-per-ticket “green building fee” — that are getting assigned to ArenaCo, the new Ratner-and-Prokhorov-owned company that will actually operate the arena. After bond payments and operating expenses, the arena is projected to turn a profit of around $46 million its first year of operation, rising slightly in subsequent years.

While that would seem like a decent cushion, there are reasons for the dynamic duo’s bean counters to be at least a bit concerned. First off, the Goldman Sachs doc lists the bond payments (listed here as “PILOTs,” for the fake “payments in lieu of taxes” that will be used to service the bonds) as “preliminary, subject to change” — and as we’ve seen this week, those figures are only going up. Secondly, it doesn’t account for the fact that Ratner and Prokhorov will presumably want to be repaid for their cash outlay on the arena, currently estimated at $293 million. Not to mention the $300 million Ratner spent to buy the Nets originally, or the tens of millions he’s lost since then while running the team into the ground.

And what could be more interesting is what’s not on the chart: the projected finances of the Brooklyn Nets once they land in the borough of overpriced Asian fusion cuisine. With all those other arena revenues dedicated to paying off the arena, that would leave the Nets to survive mostly just on ticket sales — which, while no doubt higher than they’re getting in the Meadowlands, could amount to a pretty thin gruel compared to their NBA brethren, especially if the team never wins another game.

In the worst case scenario, the Prokhorov-owned Nets could end up the NBA’s version of the Florida Marlins, forced to live on crumbs while their landlord (Ratner mostly, though Prokhorov would get 45% of ArenaCo along with 80% of the Nets) keeps any profits.

It probably won’t come to that — for all we know, Prokhorov has a secret pot of nickel smelting money ready to throw at LeBron James. But the importing of the Nets to Brooklyn still looks increasingly less like the win-win it was originally sold as (Jason Kidd! Affordable housing! Marty Markowitz crying tears of joy!) than like taking a lemon and squeezing out a few cups of lemonade. Which, if you’re a Nets fan, is probably about all you can hope for right now anyway.